The past two years have seen a number of legislative changes that affect employers. Employers must ensure they understand the latest changes concerning taxes, healthcare reform, and other legal issues and how they can impact their business. Here is an overview of some of the most important changes business owners need to be aware of.
1. Tax Changes
a. A temporary reduction in the employee’s share of the Social Security tax is in effect for 2011 as a result of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010. The portion of the tax paid by employees has been reduced to 4.2% from 6.2% for the first $106, 800 in wages paid to employees during 2011. Benefits for employees recorded by the Social Security Administration will be unaffected by the reduced employee rate and the employer’s share of the tax will remain unchanged at 6.2%.
b. The HIRE Act, which exempted employers from paying their share of Social Security taxes on the wages of certain employees who were newly hired after February 3, 2010, and before January 1, 2011, does not apply to wages paid after December 31, 2010. However, employers may still be eligible for a $1,000 tax credit to be applied when they file their 2011 tax return for any eligible employee hired under the HIRE Act that remained in their employment for at least 52 consecutive weeks.
c. The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 includes an incentive that allows businesses to invest in capital equipment and deduct 100% of that investment. In addition to billions of dollars in tax cuts to businesses, the Treasury Department estimates that the average cost of capital for business investment will decrease from 7.18% to 1.68%, an overall reduction in cost of 75%. They have also estimated that the temporary 100% expensing will produce a $50 billion increase in capital investment.
a. Effective January 1, 2011, funds from FSA, HRA, HSA and Archer MSA accounts can no longer be used to purchase over-the-counter medicines or drugs, except insulin, unless prescribed by a physician. Patients with FSAs and HRAs who purchase prescribed over-the counter medicines or drugs will need to submit their prescription along with their reimbursement form or, if purchasing with a plan-specific debit or credit card, will need to present the prescription to the pharmacist and pay at the pharmacy.
b. The penalty for nonqualified disbursements from an HSA has increased to 20% from 10%.
c. Business tax credits for certain small employers who have fewer than 25 full-time employees and pay for more than 50% of the health insurance premiums for their employees continue through 2013. (See if you qualify.)
d. Due to an amendment to the Fair Labor Standards Act (FLSA) enacted by the 2010 healthcare reform act, employers with 50 or more employees are now required to provide a clean, safe space that allows for privacy, other than a bathroom, that breastfeeding mothers can use to express breast milk. Although the employer is required to allow for break time for the mother to express milk, they do not have to pay for the time used for that purpose. Additionally, many states have laws that govern the rights of breastfeeding mothers in the workplace that may provide additional rules that employers need to follow. Refer to your state’s Department of Labor website for information specific to your state.
3. Continued IRS Audits
The IRS is expected to continue their efforts of auditing businesses, concentrating their efforts on:
- Ensuring that employers do not misclassify employees as independent contractors
- Compensation and fringe benefits paid to executives
- Appropriate reporting of wages for tipped employees
- Payroll tax audits.
4. Most State Unemployment Funds Depleted
In the years since the beginning of the recession in 2007, due to high unemployment rates and the continuing extensions of the number of weeks an unemployed worker is eligible to collect benefits, most state unemployment funds have been completely depleted, forcing states to borrow money from the federal government in the form of an unemployment insurance Title VII loan. As a result, most states have had to take action to repay the loans, including increasing taxable wage bases, shifting to a sliding rate schedule, and levying surcharges on employers. Additionally, if a state defaults on a Title VII loan, employers in that state receive a reduced FUTA tax credit, resulting in an additional tax liability.
As the year progresses, it is expected that there will be many other changes instituted through our legislative system. The ramifications of these types of changes can be serious and costly if a business is not in compliance. To stay up to date on payroll and payroll tax changes that affect businesses, visit the IRS, as well as federal and state Department of Labor websites regularly.